Don't Fight a Losing Battle

To see the future of energy, look at where we've been. The last 50 years has represented a period of remarkable change, and one big shift has been the emergence of the U.S.'s new fuel: energy efficiency.

Some changes may be a surprise. Natural gas is an example. According to the Energy Information Administration (EIA), Americans consumed less natural gas in 2011 than we did in 1961. Measured as a percentage of overall consumption, natural gas represented 28% of all energy consumed in 1961. In 2011, it declined to 26%.

Coal consumption may be another surprise. In 1961, 21% of all the energy consumed in the U.S. was coal. In 2011, it remained essentially the same at 20.2%. Consumption of petroleum, nuclear and renewable energy is a different story, with petroleum declining from 44% to 36%.

For last five decades, renewable energy consistently outperformed nuclear power. Nuclear power grew from almost zero to 8%, while renewable energy grew from 6% to 9%. By renewable energy, the EIA means hydroelectric power, geothermal, solar, wind, wood, waste and biofuels -- by which the EIA means biodiesel and fuel ethanol.

But the undeniable meta-trend is energy efficiency. While many see energy efficiency as a marginal contributor, the facts are very different.

We can see the trend when we combine EIA's energy consumption data with the Bureau of Economic Analysis's (BEA) gross domestic product data. The meta-trend is a consistent and multi-decade decline in the nation's energy consumption. To see the trend, look at this chart:

The vertical axis is annual energy consumption, divided by gross domestic product. EIA's energy figures include all sources. BEA's GDP figures are chained 2005 dollars. The trend is clear. For the U.S. to produce $1 of GDP in 2011, it needed less than half the energy than it required 40 years earlier.

The multi-decade straight-line trend suggests a lot is going on. Fellow Real Money contributor Roger Arnold agrees that energy efficiency may be a significant contributor, but it may be only a part of a larger picture. He suggests the U.S.'s migration away from a manufacturing-based economy toward a service-based economy could be another contributor towards the downward trend.

Nevertheless, energy efficiency is a major factor. Over the last several decades, the transportation sector increased the fuel efficiency of the nation's fleets of cars, trucks, buses, trains, planes and boats. The building industry also witnessed parallel achievements in heating and cooling technologies.

Over the last two decades, power generation has become more efficient. In the 1960s the average efficiency of a typical power coal-fired plant was approximately 20%. Today, companies like General Electric (GE) and Siemens (SI) offer combined cycle gas turbines, which can achieve 60% efficiency. Economically, solar and wind are even more efficient than gas turbines. Their input and production costs are near zero.

Looking at the meta-trend suggests energy efficiency will help winnow out the winners from the losers. The former will likely comprise the companies that develop or deploy energy efficient technologies -- such as Westport Innovations (WPRT), Cummins (CMI), Rolls-Royce and GE -- that are constantly improving engine technologies for trucks, aircraft and watercraft. Also among the winners will be firms like Calpine (CPN) and NextEra Energy (NEE), which own energy-efficient power-generating equipment.

Big gains are expected energy-efficiency technologies falling under the heard of demand-response (D-R). D-R is software-driven technology that offers consumers cash savings in return for energy conservation. The leaders in this emerging technology are companies like EnerNOC (ENOC), Exelon (EXC) and Comverge.

It is becoming increasingly clear that solar will answer the call for more energy efficiency; it will likely become a disruptive technology. Solar is poised to displace fuel-hungry water heaters and power-peaking supplies. As more is added to the nation's energy mix, less primary fuel will be needed, and energy-efficient gains will accelerate. Solar is responsive to seasonal and daily peak demands for intermittent sources of power -- whereas wind is less responsive to market peaks.

Among the long-term losers, meanwhile, are steam-power plants. Their efficiencies are limited by the second law of thermodynamics, and it difficult for them to achieve much above 30% efficiency. Steam power plants include most of the nation's fleet of coal-fired power plants. Since thermal coal is used almost exclusively for the power industry, meta-trends suggest the coal industry will be facing growing headwinds. Domestic mining companies like Peabody Energy (BTU), Alpha Natural Resources (ANR) and Arch Coal (ACI) may be playing musical chairs with the power industry as the power industry migrates away from boilers.

Long-term energy investors should consider the meta-trend. Rather than fight a losing battle with old technologies, they might want to consider opportunities to swim with the current. The current is clearly running in the direction of energy efficiency.